Employee Sponsored Plans

Question 1

What are the characteristics of Defined Contribution (DC) Plans?

Answer 1

• Separate participant accounts
• Employer and/or employee contributions
• Contributions as a percentage of pay
• Government limitations on contributions
• investment risk Bourne by the employee

Question 2

What are the Advantages of Defined Contribution plans for the Employee and for the Employer?

Answer 2

Employer:
Contributions comprise the majority of plan expenses

Expenses can be easily budgeted

Employee:
More control over employer provided investments than with Defined Benefits plans

Portable tax deferred retirement vehicle

Question 3

Disadvantages of Defined Contribution Plans for the employer and the employee?

Answer 3

Employer:
Complexity of legal requirements (non- discrimination testing, fiduciary accountabilities)

May not provide the desired benefit when the employer wants individuals to retire

Employee:
Requires greater financial awareness

May not provide the desired benefit when the employee is ready to retire

Question 4

Types of Defined Contribution plans

Answer 4

401K
403b
457b
IRA
Savings/Thrift
Profit Sharing
Money Purchase
Employee Stock Ownership Plan (ESOP)
Target Benefit

Question 5

Define 401K plans:
Definition:
Features:

Answer 5

Definition:
Enables employees to make pretax contributions through salary reduction agreements within the format of a CODA cash or deferred arrangement.

Features:
Employees contribute specified percentage through payroll deduction

Employer typically matches a percentage of employee contributions

Investments cover broad range of mutual funds to cover all major asset classes

Tax deferred earnings on investments

Automatic contribution rate increases/escalator provision - overcomes passively maintaining same contribution rate over time

Automatic enrollment requires employee to actively request to be excluded from the plan

Question 6

Define 403b tax sheltered annuity
Definition:
Features:

Answer 6

Definition:
Similar to 401k offered to tax exempt organizations: public school, college, university and certain charitable organizations

Tax advantages for participants
- tax deferred contributions
- tax deferred earnings on retirement money
- carry over annuity when changing jobs or retire

Question 7

457b definition

Answer 7

Definition:
Tax deferred retirement plan available to employees of government and certain tax exempt organizations. Defer on a pretax basis. Contributions through payroll deduction up to prescribed limits.

Like 401k - catchup contributions participants over 50

Tax deferred

Question 8

What are the 2 types of Individual retirement accounts

Answer 8

Traditional IRA
Roth IRA

Question 9

Are IRAs company sponsored plans?

Answer 9

No - personal savings Pilar of retirement funding sources

Question 10

Define traditional and Roth IRAs

Answer 10

Traditional IRA: contributions are tax deductible and withdrawals are taxed at the then current rate

Roth IRA: contributions are not tax deductible, qualified withdrawals are exempt from federal taxes

Question 11

Define Savings/Thrift Plan
Definition:
Features:

Answer 11

Definition:
Employee contributions on a discretionary basis with potential employer match

Features:
- usually has a matching employer contribution
- supplement other retirement plans
- contributions typically after tax if no 401k

Question 12

Define Profit Sharing Plan
Definition:
Features

Answer 12

Definition:
Employer defines a formula to allocate profit shares to employees

Features:
- employer contributions
- contributions not required
- may include a IRC 401k salary reduction feature rarely standalone

Question 13

Define Money Purchase Plan
Definition:
Features:

Answer 13

Definition: Can include contributions from employee and employer based on a formula

Features:
Contributions from employer and employee after tax

Does not allow pretax contributions

Annual contribution required, regardless of company profitability.

Annuity

Question 14

Employee Stock Option Plan (ESOP)
Definition:
Features:

Answer 14

Define:
A plan that allows employees to receive accrued shares upon retirement or separation.

Features:
Both employer and employee contributions, primarily company stock

Legal requirements broad based employee participation

Employer receives tax advantages and financing opportunities

Distributions may be lump sum or installments over several years

Question 15

What does a 401(k) feature in a defined contribution plan do?

Enable qualified employees to buy company stock at a reduced price

Includes a predetermined and defined formula for allocating profit shares among participants

Enables employees to make pretax contributions through salary, reduction agreement agreements

Credits employee accounts with varying contribution percentages calculated individually at the time of the plan in inception

Answer 15

Enables employees to make pretax contributions through salary reduction agreements

Question 16

Which of the following best describes a money purchase plan

An employer contributes to the employee’s account based on a formula, regardless of profits

Employees, retirement funds are comprised mostly of company stock

Stock ownership in private organizations is transferred from owners to employees

Employee share in the success of the organization

Answer 16

An employer contributes to the employees account based on a formula, regardless of profits

Question 17

Which plan allows employees to make contributions on a discretionary basis within limits

Money purchase plan

ESOP

Savings thrift plan

Profit sharing plan

Answer 17

Savings thrift plan

Question 18

The internal revenue code place a certain re-purchase obligations on companies with which of the following

Target benefit plan

ESOP

Cash balance plan

401(k) feature with defined contribution plan

Answer 18

ESOP

Question 19

Which of the following plans combines features of a defined benefit plan and those of a defined contribution plan

Money purchase plan

Cash balance plan

Savings thrift plan

Employee stock owner support

Answer 19

Cash balance plan

Question 20

Which define contribution plans are considered hybrid

Answer 20

Cash, balance, plans, and target benefit plans

Question 21

Why do employers offer hybrid retirement plans

Answer 21

Portability

Transfer of risk

Increased flexibility in plan design

Reduced administrative expenses

Reduced funding expenses versus traditional defined benefits, plans

Question 22

Which defined contribution plan is considered a hybrid plan with a hypothetical account

Answer 22

Cash balance plan

Question 23

Define cash balance plan
Definition
Features

Answer 23

Definition
Blends the features, a traditional define benefits plan with the features of a defined contribution plan

Features
Accounts are hypothetical
Contributions - employer as a percentage of pay
Investments - guaranteed rate
Regulation— ERISA

Question 24

Give an example of how a cash balance plan is set up

Answer 24

Plan provides a benefit of 5% of pay annually with an interest credit equal to the one year T bill rate in effect on the first day of the plan year

Question 25

Define target benefit plan
Definition
Feature features

Answer 25

Definition
A plan designed to achieve a specific targeted benefit for participants upon retirement

Features
Accounts - individual accounts
Contributions - employer flat amount
Investments - participant directed
Distributions -account value at retirement
Actuary may be required

Question 26

Give an example of how a target benefit plan is set up

Answer 26

Plan will fund to provide a target benefit equal to 50% of the final average pay earned over 25 years